FEATURE: Diversifying a country’s economy isn’t a neat solution to climate change– it just changes the risks

Diversifying a country’s economy is a recommended way of dealing with the impacts of climate change. But is it really the answer? Helen Parker and Guy Jobbins have looked at what it means in practice for Rwanda and Senegal, and find that diversification isn’t a magic bullet.

Climate resilience is a hot topic right now, for policymakers, donors and practitioners. Last December’s Paris Agreement emphasised the importance of controlling climate change and building resilience to it. The agreement recognises that economic measures are an essential part of resilience. Articles 4 and 7 highlight the role of economic diversification for climate change mitigation and adaptation.

However, our new research, with case studies in Rwanda and Senegal, shows diversification has mixed effects on the vulnerability of individuals and economies to climate risks.

Chasing chances for growth

Economic diversification can be good for growth, by developing new sectors, new market opportunities, or activities to add value to a product, such as processing or packaging. For example, in Rwanda, a new potato processing factory produces crisps to be sold across East Africa, creating a higher value product and expanding the market.

Over time, diversification fosters ‘structural transformation’, when the composition of an economy changes. Typically, structural transformation reduces dependence on primary commodities such as tea, coffee, oil or minerals, and supports growth of industry, manufacturing and services.

But in many low-income countries, particularly in Sub-Saharan Africa, rapid economic growth over the last decade has depended on a narrow base of agriculture and natural resource exports. This growth is faltering with falling commodity prices and slowing demand from China. Moving away from dependence on primary commodities offers a potential solution.

Different approaches in Senegal and Rwanda

Senegal is a semi-arid country which experiences frequent drought. To reduce its reliance on agriculture, the government has focused on developing coastal tourism, which contributed 12% of GDP in 2014. This cross-sectoral diversification provides people with new opportunities to find highly-paid jobs as hotel staff and guides. Children from farming families work in tourism during the dry seasons, to supplement household income.

However, Senegal’s diversification has not yet created the high growth rates seen in other parts of Africa. The country experienced only 3-4% annual average growth from 2000-2014.

In contrast, Rwanda has focused on diversifying the agricultural sector, through new crops, new technology and new markets. Government funded trainers worked with farmers to reduce crop losses, improve harvests, and form cooperatives. 80% of Rwandans live in rural areas and depend on farming, so strong agricultural growth has also reduced poverty, which fell 14% from 2001-2011.

However, Rwanda has a variable climate and the economy still depends mostly on rain-fed agriculture. Growth averaged 7-8% from 2000-2014, but failed rains coupled with aid cuts in 2013-2014 led to a major drop in GDP.

Diversification only changes the risk countries face

Diversification both within and across sectors in Rwanda and Senegal has not reduced overall risk. It has just changed the nature of the risks to which countries are exposed. In Senegal, while agriculture is vulnerable to drought, tourism is affected by coastal erosion, sea level rises and international market shocks, such as regional terrorism which discourages travel. The impact of drought on agriculture in 2013 had roughly the same net economic effect as Ebola had on tourism, both causing a 0.2% drop in GDP6.

In Rwanda, diversification into commercial crops such as maize has increased farmers’ incomes, which helps in times of need. But maize is less hardy than traditional crops. High demand for maize in neighbouring countries means Rwandan farmers have stopped growing drought-resilient crops such as cassava. This is risky if rains fail. Irrigation provides some protection. However, agricultural water use may compete with government plans to develop high-value, ‘water-thirsty’ sectors such as mining.

Decisions around diversification must consider climate risks

The physical and human capital of diversification is expensive. Building hotels, irrigation schemes and processing plants and training people in sector-specific skills are long-term investments. Decision-makers seeking to build resilience and drive growth must ‘screen’ economic diversification policies for climate related risks. Failing to do so exposes economies and communities to longer term vulnerabilities.

Successful and sustainable economic transformation accounts for changing risks now and in the future. There are ‘win-win’ areas to build resilience. Insurance, disaster risk reduction and management (DRRM) and investment in education can support both diversification and climate resilience. The UNFCCC National Adaptation Plan (NAP) process is an ideal opportunity to screen policies and identify ‘no regret’ interventions.

Climate action and economic development must be mutually beneficial. We cannot assume that all ‘economic diversification’ is climate-resilient. Using the terms together does not mean they are synonymous. Poorly planned diversification purely for growth puts economies, livelihoods and lives at risk in a changing climate.